Stock Analysis

Companies Like NGM Biopharmaceuticals (NASDAQ:NGM) Are In A Position To Invest In Growth

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NasdaqGS:NGM
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Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should NGM Biopharmaceuticals (NASDAQ:NGM) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for NGM Biopharmaceuticals

When Might NGM Biopharmaceuticals Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In March 2022, NGM Biopharmaceuticals had US$330m in cash, and was debt-free. Importantly, its cash burn was US$89m over the trailing twelve months. So it had a cash runway of about 3.7 years from March 2022. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

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NasdaqGS:NGM Debt to Equity History June 15th 2022

How Well Is NGM Biopharmaceuticals Growing?

Over the last year, NGM Biopharmaceuticals maintained its cash burn at a fairly steady level. Unfortunately, however, operating revenue actually dropped 8.7%, which is a worry. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For NGM Biopharmaceuticals To Raise More Cash For Growth?

While NGM Biopharmaceuticals seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of US$995m, NGM Biopharmaceuticals' US$89m in cash burn equates to about 8.9% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is NGM Biopharmaceuticals' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way NGM Biopharmaceuticals is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for NGM Biopharmaceuticals that investors should know when investing in the stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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